Building the Northern Powerhouse: How Do We Boost Transformative Infrastructure Investment in Northern England? Graham Winch and Rehema Msulwa

Infrastructure@Manchester 1

Infrastructure@Manchester Building the Northern Powerhouse: How do we boost transformative infrastructure investment in Northern England? Graham Winch and Rehema Msulwa

Report 1 of 4 2 Building the northern powerhouse: How do we boost transformative infrastructure investment in northern England? Infrastructure@Manchester 3

The publication of Transport When Barclays became the first for the North’s Strategic bank recognised as a UK Transport Plan in February Government official partner in 2019 was a momentous delivering the Northern Powerhouse step for the Northern programme, I was determined to Powerhouse. The Plan keep the momentum going in the builds on the work of the drive for equality of prosperity Northern Powerhouse across the whole UK. We went on to Independent Economic help found the independent, Review published in 2016 business-led Northern Powerhouse and shows how the North Partnership, coordinating campaigns can move from a “predict and economic advocacy across all and provide” to a “vision sectors based here in the north. and validate” approach to infrastructure development.

The economy of the North of England continues to fall We are delighted to be working in partnership with Barclays This commitment is a personal one. As a proud Our commitment goes beyond this, however. We are behind that of the South East, and a core part of reversing on this series of thought pieces from Infrastructure@ Yorkshireman, I joined Barclays as an apprentice in Barnsley determined to convene the north of England’s most that relative decline is transformative investment in Manchester here at Alliance Manchester Business School, over 35 years ago, and as my career has progressed, I’ve experienced and influential businesses, policymakers and transportation, energy, and digital infrastructure. which aims to support the development of transformative remained firmly rooted in this part of the world, doing my academics, working with them to generate new and Together these will enable the Northern region to yield infrastructure for the Northern Powerhouse. best to help clients, customers and colleagues along the innovative solutions for improving prosperity for this the kind of dynamic economic benefits from which the way. I’ve never been more excited at the role we can and dynamic and potential-rich part of the UK. South East has long benefited. Improved infrastructure The first two papers in the series lay out the challenges for the should play in unleashing the next generation of technology, means employers will be able to draw from a wider pool of Northern Powerhouse in financing and funding infrastructure skills and innovation to deliver wealth and prosperity for I am delighted to introduce this new research series, skilled workers; stimulate innovation through more intense investment, while the last two in the series turn to the society and business across the north of England. Infrastructure@Manchester, from Alliance Manchester Business interaction; and facilitate access to higher paying jobs for challenges in delivering infrastructure assets once they have School. The series is one of our flagship thought partnerships those in the more impoverished parts of the region. been financed to the budgets and schedules expected. Barclays’ heritage across the north stretches back as far as in support of the Northern Powerhouse programme, and one the late eighteenth century. We were involved in some of the I’ve been greatly looking forward to. Whilst the views and Together with investments in skills and education, the most crucial infrastructure investments of the time, such as opinions expressed are those of the University’s academics and North’s new infrastructure plans will transform economic the financing of the Manchester Ship Canal in the 1890s and not Barclays, we are nonetheless pleased to be part of shaping growth, particularly in the high tech, professional services, the Stockton to Darlington Railway earlier that century. the policy debate about the north of England’s exciting future. and cultural sectors. Today, we are proud of have a significant presence in the region - with 12,000 colleagues employed across the This higher rate of growth is only sustainable if it is regions, innovative and world-leading contact and accompanied by decarbonisation of transportation technology centres at Sunderland, Wavertree and Radbroke, through smart digital ticketing, electrification of motive and 2019 sees the first anniversary of our popular £500m power, and promotion of active travel. This will also make Professor Fiona Devine CBE Northern Powerhouse Growth Fund to help SME’s grow and Tony Walsh our cities healthier and more pleasant places to live. Head, Alliance Manchester Business School scale across the north. Head of North and Mid Corporate, UK Barclays 4 Building the northern powerhouse: How do we boost transformative infrastructure investment in northern England? Infrastructure@Manchester 5

Executive summary Understanding the role of infrastructure and its value

Welcome to the first in a series of papers in a new research Infrastructure is the cornerstone of modern This research will focus on economic infrastructure such as economies and productive societies. transportation, energy, and digital technology with the potential to transform the economic performance of the programme, Infrastructure@Manchester, produced by Increasingly complex and interconnected Northern Powerhouse. We will not cover direct consumption infrastructure services – unimaginable even a goods such as housing, or social infrastructure such as Alliance Manchester Business School and Barclays. decade ago – are required to address the hospitals. These are no less important, but play a different role in economic development. challenges of today’s world. These challenges The purpose of this research is to support the development of In this first paper, we will argue that transformative range from social stability, rapid urbanisation The variety of infrastructure services (see technical below) economic infrastructure for the Northern Powerhouse by infrastructure investment in Northern England is presently and technological advances to globalised offered by infrastructure assets is indicated in Technical Note: faced with two main challenges. First, it suffers because Infrastructure Services Classification, on page 21. providing original analysis and ideas, thereby challenging issues such as climate change2 preconceptions about infrastructure development policy. of the historic under-investment by the UK as a whole in . which details a series of definitions of infrastructure infrastructure, and second it suffers because the investment services, developed from earlier Alliance Manchester 3 There is a huge opportunity for policymakers at all levels in transformative infrastructure that has been made favours Business School research . across the UK to fully unlock the benefits of infrastructure the South East. If the UK is to achieve the ambitions of the investment in order to achieve the aims of the Industrial Industrial Strategy for the whole country, both of these Strategy. This will require a number of significant changes to challenges need to be addressed. More specifically, we will: current best practice in infrastructure investment. Our methods for selecting projects will need to change so that they • Explain why infrastructure investment is important for Technical Note: Infrastructure Services capacity to earn future income; and third, it affects real reflect the full range of benefits from the investment, thereby economic development in the Northern Powerhouse wealth. Infrastructure services are, therefore, valued as stimulating growth rather than following growth. Our methods through an evaluation of the current context. According to the World Bank, the primary measure of essential for health and the creation of environmental of project delivery will also need to change so that promises economic benefits from infrastructure derives from the amenities (e.g. water and sanitation); made in the investment case are met rather than overrun. We • Distinguish between enabling and transformative operation and the value of the services generated by or as items of consumption in their own right (e.g. believe that such a modernisation will be crucial in realising the infrastructure assets and the infrastructure services the physical asset, rather than the asset itself. To that recreational transport, residential ambition of rebalancing the UK economy and ensuring all areas they provide. end, infrastructure services contribute to economic telecommunications). Moreover, infrastructure of the UK benefit equally from infrastructure investment. This development both by increasing productivity and by services provide access to jobs, education, and way, every pound spent will contribute to greater levels of • Review the financing of infrastructure, identifying providing amenities which enhance the quality of life. opportunities for the consumption of other goods. national productivity, stronger levels of employment, and the principal challenges in financing and funding greater prosperity for people’s lives across the UK. such investment. Regarding productivity, infrastructure services Reducing the cost of infrastructure services and stimulate aggregate supply and demand through at improving service provision can, therefore, have Following this we will: least two channels. First, transport, water, and far-reaching implications. Realising the benefit of the electricity, for example, serve as intermediate inputs to efficient generation of infrastructure services can • Make two overarching recommendations regarding future production. Any reduction in their costs raises the allow enterprises to lower their costs with favourable policy for infrastructure development in the Northern profitability of production, thus permitting higher impacts on profits and the level of production achieved. Powerhouse on sectoral coordination and focus of levels of output, income, and/or employment. Second, In addition, increased accessibility to reliable and national lobbying efforts. the availability of infrastructure services raises quality infrastructure services for households can productivity for other capital and labour, such as positively impact their quality of life by increasing their • Introduce the subsequent papers in this series. through a reduction in workers’ commuting time. real income and consumption, raising the productivity of their labour, and freeing time of individuals for Regarding quality of life, infrastructural services are higher-value activities in a manner analogous to the linked to both personal welfare and the environment. benefits realised by firms. These impacts are realised in three broad respects: first, reductions in the cost and improvements in Source: Kessides, C. 1993. The Contributions of Acknowledgements infrastructure services to households can have Infrastructure to Economic Development: A Review of beneficial effects on increasing their real income and Experience and Policy Implications. Washington DC, consumption; second, infrastructure affects labour World Bank. We are extremely grateful for the feedback of Professor Diane Coyle, Cambridge University, Professor Ian Reeves, Synaps LLP, productivity and access to employment, and thus the Simon Warburton, Transport for Greater Manchester; and Ian Palmer, Transport for Greater Manchester on earlier drafts. We, of course, remain entirely responsible for the final version.

2 World Bank Group (2015) Infrastructure Strategy Update FY 2012-2015: Transformation through Infrastructure. World Bank Group. 3 Developed from Luger, M. Butler, J. and Winch, G.M. (2013) Infrastructure and manufacturing: their evolving relationship: Future of Manufacturing Project: Evidence Paper 20, London, Government Office for Science. Figure 4. 6 Building the northern powerhouse: How do we boost transformative infrastructure investment in northern England? Infrastructure@Manchester 7

Enabling or Transformative infrastructure? Technical Note: Infrastructure Services Classification

Many infrastructure assets provide a range of services Commuting – the movement of people to their regular workplaces. Superior infrastructure allows people to commute simultaneously, and occasionally these services compete for the quicker and less stressfully and thereby allows organisations to draw on more regionally distributed skills. The prototypical finite capacity of the same asset. For instance, a railway can infrastructure asset here is the urban transit system. provide commuting, transporting, and travelling services. On Transformative the US rail network, transportation has been prioritised, to the Positioning – the location of particular vehicles in space and time. The advent of global positioning systems (GPS) has 4 infrastructure detriment of travelling and commuting . Elsewhere, other allowed precise locations to be determined quickly and movement to be tracked. The prototypical asset here is the lighthouse, infrastructure assets provide services that reinforce, rather than Transformative infrastructure, on the other but satellite systems are now vital infrastructure assets. compete with, each other. For instance, an airport’s networking hand, increases the potential productivity services complement its travelling services. Complex growth rate above the current trajectory. Transporting – the movement of goods either as part of the supply chain into manufacturing or onwards through the combinations of these assets, with their competing and It does this by providing opportunities for distribution chain to market. Prototypical assets here include pipelines and ports. reinforcing services, underpin all thriving cities and economies. innovation both upstream in the development of the infrastructure asset, and downstream Travelling – the movement of people to meet with each other and visit locations for business and leisure purposes, In this context, it is useful to distinguish between enabling in the supply of new infrastructure goods distinguished from commuting. Roads and rail are prototypical. infrastructure and transformative infrastructure. Each has a and services. For instance, the development different effect on economic growth and transformative – enabling interpersonal communications beyond co-presence. Telecommunications assets of various of the telegraph was central to the Communicating infrastructure investment benefits regional economies kinds are prototypical. development of the electrical engineering powerfully and in multiple ways5. As we will show in Paper 2, while industry and provided whole new methods we have good tools for deciding which enabling infrastructure to – the creation of nodes of activity which rely for their success on their position in the network of activity, also of rapid communication. Networking build, our tools for transformative infrastructure are weaker. called “connectivity”. Airport assets are particularly important here.

Transmitting – the movement of data and energy through both fibre optic and energy distribution networks such as national grids. These two types of infrastructure do not exist in isolation. Enabling Many innovative methods of providing infrastructure Disposing – the handling of waste from business and leisure activities and the disposal of redundant assets. Sewage services come from combining different assets in new ways. systems are prototypical here. infrastructure An example is the combination of travelling services and positioning services such as GPS, which together allow real- Generating – the creation of usable energy whether from fossil or sustainable resources. Enabling infrastructure supports growth on an time timetable updates at bus stops. Combinations such as existing trajectory. So long as the infrastructure this lay the ground for innovators like Uber, allowing them meets certain basic requirements (e.g. volume them to unlock the potential for whole new technologies of vehicle movements or bandwidth) then e.g. autonomous vehicles. In other words, innovative customers tend not to notice it, except at combinations of enabling infrastructures can themselves be “pinch points” where weaknesses in transformational. However, lack of an overall strategy can infrastructure service provision get in the worsen existing problems. For instance, 50% of the increase way of what customers want to do. in traffic congestion in San Francisco between 2009 and 2016 is attributed to “transportation network companies” such as Uber and Lyft6.

4 Kanter, R.M. (2015) Move: Putting America’s Infrastructure Back in the Lead. New York, Norton. 5 World Bank (2011) Transformation through Infrastructure, Washington DC, World Bank. 6 Bradshaw, T. (2018) Robo-taxis or high-tech tunnels? The race for traffic utopia. Financial Times November 23rd 8 Building the northern powerhouse: How do we boost transformative infrastructure investment in northern England? Infrastructure@Manchester 9

The international infrastructure context The gap in transformative infrastructure potential is serious

Despite this transformative effect infrastructure can have, addressed because it lets down the UK as an otherwise According to the 2016 Northern Powerhouse Independent However, the definition of “spending” used in this analysis is globally the UK lags behind its peers on investment in hospitable environment for business. Economic Review (NPIER)10, the North of England is home to very broad, and includes categories such as London’s 100% infrastructure development, as shown in table 1.1. This gap is 16 million people and 7.2 million jobs. The region has many business rate retention and private sector finance levered by partly down to under-investment: the UK spent 2.2% of GDP The McKinsey Global Institute8 estimates that the UK has high profile and growing businesses and a highly skilled public sector investment. If we focus on direct government on infrastructure in the period 2008-13, a similar percentage under-invested in infrastructure for years, with infrastructure workforce. It houses high value sectors such as advanced spending alone, we can see from table 1.2 that the to the US and Germany but significantly less than France at investment as a share of UK GDP only rising above manufacturing, with the engineering of low carbon Department for Transport’s road and rail budget allocates 3.5%, Japan at 4%, Italy at 4.7% and Australia at 4.7%. pre-financial crisis levels in 2017. Within the UK, the North technologies; and health innovation, for instance, with the more money to the North than would be justified by share of has shared this underinvestment. Given the transformative development of smart medical devices. The region population or GVA alone. We would also note that 100% Moreover, the perceived quality of UK infrastructure was effect that infrastructure can have, it is essential this is generated around £290bn of Gross Value Added (GVA) in business rate retention is available under some devolution ranked 24th globally in the latest World Economic Forum addressed. A start has been made in the Industrial Strategy 2015, about one fifth of the UK’s total. The North also deals in the North12, and as the Metrolink case study shows, it report7, with inadequate infrastructure identified as the most and the formation of the National Infrastructure Commission, generates 17.7% of UK manufacturing exports. is possible to lever private finance in the North where the serious barrier to business by 12.6% of respondents – much but much more needs to be done to allow the UK to catch up business case is strong. higher than for any comparable country. It is important this is with comparable nations. However, the NPIER also reports that there are persistent gaps in GVA per capita and productivity performance in the We infer from this analysis that the challenges around North compared to the rest of the UK. The nominal GVA per enabling infrastructure in the North derive from the long- hour worked in the region is 11% lower than the national running underinvestment in economic infrastructure Supply of infrastructure Spend on infrastructure average, and 32% lower than in London. Productivity is 25% generally in the UK, and that the regional equity issues are Perceived Infrastructure most problematic for doing development 2008-13 Quality (1-7 scale) lower than the national average. This gap has been persistent largely around transformative infrastructure projects. Much business (% of respondents) (% of GDP) (Source: WEF EOS) over the last 30 years. In 2014, it equated to a £4,800 per of the overall imbalance comes from these south-east (Source: WEF EOS) (Source: National Statistics) person difference in income between the North and the UK orientated mega-projects such as Crossrail, HS2 Phase 1, average, and a £22,500 per person difference between the and Heathrow redevelopment13. We therefore argue that the United Kingdom 5.2 12.6 2.2 North and London. The NPIER attributes this Northern Powerhouse needs to focus its campaigning underperformance to gaps in skills, innovation, investment, energies on ensuring that Northern Powerhouse Rail and HS2 United States 5.7 5.2 2.4 and R&D intensity, particularly in the North’s large urban Phase 2 are fully delivered in an integrated way rather than areas. This gap holds back the local and national economy. dissipating effort across a larger number of enabling Fixing it requires a radical change in policy. infrastructure projects. Getting the nuclear energy Canada 5.2 7.9 3.5 programme back on track would also reap significant The Northern Powerhouse programme was designed to transformative benefits. Together, these investments will France 6.0 0.6 3.5 facilitate this change. It was established by the UK transform the region’s economic performance. Government to raise the North’s productivity, stimulate its growth and attract significant inward investment. The Germany 5.7 3.8 2.0 potential gains are huge. The NPIER found that by 2050 the economy of Northern England could be around £100bn Road Rail Italy 4.3 6.1 4.7 bigger than current projections suggest. This would translate Average Spending (Highways (Network Rail) into an extra 850,000 jobs, a 4% increase in productivity and per annum England) (2012 prices) Australia 4.8 6.1 4.7 more money in the pockets of local people. (2015 prices)

But talk to businesses in the North and you immediately Historical allocation £479m £600m Japan 6.2 2.1 4.0 realise that people are doubtful. The perception is that the North of England loses out to London and the South East when it comes to investment flows. There is evidence to Population-based £380m £579m Table 1.1. UK Investment in Infrastructure and Perceived Infrastructure Quality9 support this perception. For instance, analysis by IPPR North found that over the period 2012/2013 to 2016/2017, £121 GVA-based £305m £465m billion was spent on infrastructure across all UK regions11. Of this, London received £33.3 billion, or approximately £3,902 per capita – well over double the Northern England average of Table 1.2. Road and Rail Financing in the North, Actual and £1,513 per capita over the same period. Hypothetical (based on share of population and GVA)

10 SQW (2016) The Northern Powerhouse Independent Economic Review. Transport for the North 7 World Economic Forum (2016) The Global Competitiveness Report 2016-17 11 Raikes, L. (2018) Future Transport Investment in the North. IPPR North. 8 McKinsey Global Institute (2018) Solving the United Kingdom’s Productivity Puzzle in a Digital Age. McKinsey. 12 Raikes, L. Millward, L. & Longlands, S. (2018) State of the North: Reprioritising the Northern Powerhouse. IPPR North 9 Sources: Data taken from World Economic Forum (2016) The Global Competitiveness Report 2016-17. Geneva, WEF and McKinsey Global Institute (2016) Bridging Global Infrastructure Gaps. McKinsey. 13 Cox, E & Davies, B. (2014) Transformational Infrastructure for the North: Why We Need a Great North Plan. IPPR North 10 Building the northern powerhouse: How do we boost transformative infrastructure investment in northern England? Infrastructure@Manchester 11

Northern infrastructure is interconnected but uncoordinated Mutually Reinforcing Infrastructure Assets and Services

We have, so far, focused on transportation, but individual Digitisation – the mass adoption of connected digital infrastructure asset types should never be looked at in communicating and transmitting services by consumers, isolation because they are mutually reinforcing in terms of enterprises, and governments – has emerged in recent years economic development. Consider transport, energy and as an important economic driver that accelerates growth and digital infrastructure in the North. facilitates job creation. A study by Tech North showed that digitisation performs best when there is a tight-knit Good transport systems enhance connectivity, which community of relevant businesses – i.e. agglomeration. enables economic development by supporting the productivity of urban areas – this was fundamental to the Individual Northern cities are strong in terms of digital The electrification of road transportation The full development of Cumbria’s business case for Metrolink (see case study). Good transport connectivity and Ofcom reports that in most of the North’s links support deep and productive labour markets and allow major city regions, more than 90% of businesses can access is impossible without major investment Energy Coast (wind and nuclear) businesses to reap the benefits of agglomeration. We will superfast broadband, exceeding national access levels. in electricity transmission services in the will depend on improved road and explore the crucial concept of agglomeration further in Paper However, Northern England also includes vast rural areas, 2, but a quick definition is the net benefits available from including the two least densely populated counties in form of charging points. rail transportation. bringing together firms and skilled workers in close proximity. England. Here digital infrastructure service levels are poor: in Cumbria and North Yorkshire only 83% of premises have Energy plays a vital role in economic growth as it is required to superfast broadband access, and in Northumberland the power the economy and society through generating and figure is 86%. transmitting services, and the North is uniquely placed to lead the UK’s transformation towards a low carbon economy. The Most importantly for our argument though, is that these region currently accounts for 48% of UK renewable generation infrastructure assets and the services they provide are capacity, with particular opportunities in tidal generation, mutually reinforcing. You can see just a few areas of mutual carbon capture and hydrogen energy. It also has a unique reinforcement on the opposite page. concentration of nuclear expertise, with full fuel cycle capabilities, coupled with a world-class skills base. This means Part of the problem is that responsibility for infrastructure The development of the digital economy Infrastructure resilience is also mutually that regaining momentum on the UK nuclear programme – developments is spread across five government departments, depends on increased agglomeration to dependent. One weakness can particularly at Moorefield in Cumbria – is relatively important overseen by HM Treasury: The Department for Business Energy for the economy of the North. The potential contribution to and Industrial Strategy, the Department for Digital, Culture provide the intensive interaction undermine an entire infrastructure the transformation of UK energy infrastructure by the North Media and Sport, the Department for Transport, the required for rapid innovation. This ecosystem. For example, during the is, therefore, outstanding. The aspiration of the Northern Department for Environment, Food and Rural Affairs and the Energy Strategy is that “by 2050 we will be the leading low Ministry of Housing, Communities and Local Government. agglomeration in turn relies upon Cumbrian floods of 2015, rising water carbon energy region in the UK, with an energy economy improved commuting and travelling hit a power substation, knocking out worth £15 billion per annum and 100,000 green jobs”. We therefore argue that the Northern Powerhouse would benefit from a coordinating body for infrastructure services from public transportation and a water pumping station and the local development and resilience. The formation of the NP11 very high speed transmission services mobile phone network. Card machines grouping of the Chairs of the eleven Local Enterprise Partnerships in the Northern Powerhouse area is a start from fixed and mobile networks. in local shops went down, meaning in this direction, but more is needed. local people were unable to buy

essential supplies.

With more intense agglomeration, failure to develop public transportation

14 Glaeser, E.L. (2010) Introduction. In: E.L. Glaeser (ed) Agglomeration Economics. Chicago, University of Chicago Press. will lead to gridlock as people switch to 15 IPPR North (2017) A Northern Energy Strategy. IPPR North. innovative road transportation using 16 Tech North (2016) The Digital Powerhouse. Tech North. positioning services. 17 Ofcom (2016) Connected Nations 2016: Interactive Summary 18 Ibid 12 Building the northern powerhouse: How do we boost transformative infrastructure investment in northern England? Infrastructure@Manchester 13

Manchester Metrolink: a northern infrastructure success

Manchester Metrolink is the oldest and largest urban Phase 3 was a major expansion of the network to Ashton- tramway in the UK, mixing off and on-street running. It was under-Lyne, East Didsbury, Manchester Airport, and able to cover its operating costs for 2016/17, although the Rochdale via Oldham. The Rochdale line was financed from a shift to a new operational contract with higher operational government grant and borrowings by the GMPTE, repayable benefits led to a net loss in 2017/2018. Opened in 1992, it has from the farebox. In order to finance the other lines from the expanded through a number of phases of redevelopment to a Transport Innovation Fund, a local referendum was held on six-line network of 99 stops, with plans for further expansion. introducing congestion charging within the M60 in order to While the details have changed over the years, the principles generate a funding stream. This was overwhelmingly of its success have remained much the same. In essence, rejected by residents, and so the business cases for other these are mixed finance in order to construct the network; lines were re-evaluated. This led to the establishment of the funding from the farebox; and private sector operation of Greater Manchester Transport Fund (GMTF). The GMTF the network. Government revenue grants also helped with forms a single pot of government grants, local borrowings funding costs in the earlier phases. These are all in the and private sector contributions to finance a variety of context of strong institutional governance in the Greater transport initiatives. Funding came from a Greater Manchester area and a focus on increases in Gross Value Manchester-wide increase in Council Tax orchestrated Added in investment appraisal. through the Association of Greater Manchester Authorities (AGMA), and Manchester Airport, yielding £279.20 million Phase 1 (Bury to Altrincham) was financed by a mixture of in 2018/19. borrowings by the (then) Greater Manchester Passenger Transport Executive (GMPTE), borrowing from the The Greater Manchester Combined Authority (GMCA) was European Investment Bank, and grants from both UK formed in 2011 and GMPTE renamed Transport for Greater central government and The European Regional Manchester (TfGM) to own Metrolink and further its Development Fund. A Design, Build, Operate and Maintain development. TfGM re-let the operational contract for (DBOM) contract was then let to a private sector joint Metrolink in 2017. Financing for the next extension of the venture which transferred operational risk to the contractor network to Trafford Park combined government grants which also paid a £5m concession fee towards construction with contributions from owners of much of the land costs. This arrangement meant that Metrolink had the accessed by the line, The Peel Group, and Section 106 deals lowest proportional central government contribution of all for other developments along the route. In addition to the light rail investments of the period except the Docklands farebox and council tax, funding comes from the new Light Railway in London. Phase 2 (to Eccles) saw a major “earnback” facility under the 2014 Greater Manchester contribution from the new operational contractor, the Devolution Deal which gives Greater Manchester extra use of reserves by GMTPE and a small amount of money for the region’s infrastructure if certain levels of additional borrowing. economic growth are reached. 14 Building the northern powerhouse: How do we boost transformative infrastructure investment in northern England? Infrastructure@Manchester 15

Section two Making the Northern Powerhouse a reality: The public financing model: how to unlock investment can infrastructure investment reduce public sector net debt?

We have established the case for infrastructure investment Powerhouse and its Metro Mayors should focus their Public capital comes mainly from governments, principally We will discuss the first of these conditions in papers 2 and 3, in the Northern Powerhouse, and shown that the North campaigning efforts on ensuring that Northern Powerhouse via taxation but also via public borrowing. Public finance for and the second in papers 4 and 5. For now though, as we will shares in the long-running under-investment in UK Rail and HS2 Phase 2 are fully delivered in an integrated way. infrastructure projects therefore contributes to public show, the four conditions above apply particularly strongly to infrastructure generally. But that it is particularly sector net debt (PSND). The cost of this debt financing is the Northern Powerhouse region. disadvantaged in comparison to London and the South East A huge challenge to delivering transformative infrastructure is significantly lower relative to the private sector, due largely in the level of transformative infrastructure investment that financing and the first step to unlocking investment is to taxes and other public assets that effectively serve as A basic principle of UK practice on investment appraisal is is needed to support the achievement of the aspirations laid understanding infrastructure financing – the process of raising collateral on the debt. An alternative public-sector financing that multiplier effects are constant across investments and out in the Northern Powerhouse Independent Economic capital to invest in an infrastructure asset. Figure 1.1 indicates mechanism is the national or multinational development that, therefore, multiplier effects should not be used in the Review. For this reason, we suggest that the Northern the generic financing arrangements for infrastructure. bank19. A major advantage of such financing is that the loans calculation of benefits from an investment21. However there are off the PSND, while the effective public-sector guarantee is evidence from sectoral differences in employment enjoyed by such banks tends to make the loans cheaper. multipliers for relatively high multiplier effects from infrastructure services and a reasonably high multiplier Internationally, the proportion of GDP devoted to effect from construction activity compared to other infrastructure investment by the public sector has dropped sectors of the economy22. There is also evidence of regional as governments struggle with public deficits. However, new differences in prices within the UK, with London and the Infrastructure financing research by the International Monetary Fund20 suggests that South East having the highest, and the Northern government borrowing to invest in infrastructure Powerhouse some of the lowest prices23, and lower development can reduce PSND, under certain conditions, inflation rates outside London24. through two separate processes. First, the construction of an asset itself can increase short term economic growth. Therefore, we suggest that a public investment of £100m in Second, new infrastructure services can both enable existing infrastructure would provide a greater net benefit to the UK economic activity (e.g. by reducing commuting time) and economy if invested in the North than the South East: it transform new types of activity (e.g. by allowing new forms of would likely provide a greater economic boost relative to digital industry). These are medium to long-term benefits current activity and would likely have lower input costs and and reduce PSND through increased tax and associated rate of inflation in those costs. While we agree with HM Public Private revenues for government. Treasury that this might be difficult to calculate at the level of the individual project, we believe that the suggestion In general, public investment in infrastructure will be positive warrants further investigation at the level of differences in Government and multilateral Sovereign wealth funds, pension funds, for PSND if: regional and sectoral benefits and costs and hence the development banks banks, commercial banks, insurance overall benefits to the UK economy of a policy initiative companies, special purpose vehicles 1. There are robust project selection procedures in place around infrastructure investment outside the London area. Non-bankable but high impact projects in terms of growth, social uplift and Bankable projects i.e, predictable costs and 2. Project delivery capability is well-developed sustainability. New build projects predictable or guaranteed income streams 3. There is an infrastructure gap which creates the Subsidies and grants, guarantees, Debt and equity opportunity for investments with good returns risk sharing and funding 4. Economic activity is sufficiently moderate so that inflationary effects are mitigated

Table 1.1. Generic financing arrangements for infrastructure 19 Such as the European Investment Bank (EIB) which is a significant player in financing the Northern Powerhouse. The National Infrastructure Com- mission has proposed a National Investment Bank which has the potential to replace the EIB following Brexit but would take significant time to set up. 20 International Monetary Fund (2014) World Economic Outlook: Legacies, Clouds, Uncertainties. Washington, IMF. 21 HM Treasury (2018) The Green Book: Appraisal and Evaluation in Central Government. London, HM Treasury. 22 Office for National Statistics (2018) https://www.ons.gov.uk/economy/nationalaccounts/supplyandusetables/adhocs/008722typeiukftemulti- pliersandeffectsreferenceyear2014. 23 Office for National Statistics (2018) Relative regional consumer price levels of goods and services, UK: 2016. ONS. 24 National Institute for Economic and Social Research (2018) https://www.niesr.ac.uk/media/niesr-press-note-niesr-reacts-latest-ons-cpi-inflation-statistics-released-today-13558 16 Building the northern powerhouse: How do we boost transformative infrastructure investment in northern England? Infrastructure@Manchester 17

The private financing model: Challenges to the status quo The challenges of infrastructure investment

Private sector financing focuses on “bankability”, or whether innovative because it relied on private capital to finance the As we have seen, the success of the Northern Powerhouse Important factors for public investment include: lenders will consider financing the project. Ultimately, private project, but ongoing funding then came from the sponsoring relies on creating an environment that supports investment investors prefer it when investment costs can be forecast, government organisation rather than direct user charges. in infrastructure. Do that, and you unlock jobs, growth and • Deciding who should benefit from tolls and land value and funding streams are predictable, so it is important that However, changes to both government accounting policies prosperity. But how do you create that environment in the uplifts – the public or private sector Northern Powerhouse stakeholders encourage the and financial markets have stifled PFI, and by 2012 the real first place? According to the McKinsey Global Institute31, development of projects with predictable costs and value of projects approved was below 1996 levels26. In addition, consensus is building regarding the determinants of a • Potential changes in public accounting which would allow monetised benefits. while improving access to financing, PFI did little to address successful infrastructure policy. These fall into two infrastructure investments to be amortised rather than subsequent shortfalls in income, leaving some asset owners, different groupings. being booked as a cost at the time of investment The UK has established mechanisms to support private including hospital trusts, unable to fund capital repayments. investment. These include the UK Guarantee Scheme25, PFI has now been abandoned, but concession-type PPPs such The first, finance, relates to the institutional environment • Relaxing requirements for Public Sector Net Debt, which helps infrastructure projects access debt finance as the Mersey Gateway Bridge remain27 an option. which facilitates the flow of public and private finance into allowing the public sector to borrow for investment in where they have been unable to raise it in the markets. infrastructure investment. Important factors for private productive assets Alternatively, depending on the nature of the project and The PFI volte-face highlights an important point about the finance include: relevant criteria, sponsors can also draw on various forms of provision of infrastructure – namely the difference between The second grouping, affordability, relates to the government development capital such as repayable grants finance and funding. The former gets a project off the • Developing a pipeline of bankable infrastructure projects opportunity to reduce the cost of investment. A study by and low-interest loans. ground, while the latter is the subsequent income stream the McKinsey Global Institute33 concluded that international which provides the ability to repay the initial capital. PFI, in • Agreeing an appropriate regulatory framework infrastructure projects could save up to 38% from their Government involvement lends legitimacy to schemes where effect, addressed the financing challenge, but did not address current costs: 8% from “fact-based project selection”, 15% user charges are insufficient to service an infrastructure the funding challenge; indeed, it made the funding challenge • Developing standardised approaches to infrastructure from “streamlined delivery”, and 15% from “making the asset’s capital and operational requirements. For example, more difficult by raising the cost of capital. As illustrated in as an asset class most of existing infrastructure”. The first of these savings, subsidies can be given in cases where support is needed for figure 1.2. these funding streams take a variety of forms, fact-based project selection, will be the focus of our second the funding stream – see the Metrolink case study on page 12. from road tolls and water rates, through availability charges, Regional actors cannot really affect factors two and three, paper, while our fourth and fifth papers will investigate to repayment from general taxation. In every case, although it should be noted that the UK already has a world aspects of streamlined delivery. Different types of investors focus on different types of households ultimately fund new infrastructure28. class regulatory and institutional framework for projects. Governments tend to focus on projects with the infrastructure32. The first point highlights the importance of greatest economic and social impact, but where secure the establishment of Transport for the North as a sub- direct funding streams cannot be identified. They also focus Total £87bn £1.4bn £149bn national transport authority in April 2018 and the National on new-build projects, particularly as these often support Infrastructure Commission nationally. new jobs, services and growth. In contrast, some private Communications £1bn £4bn £12bn investors may tend to avoid such projects given that they Energy £4bn £75bn carry both construction and operational risks and prefer to invest in operating assets. Flood £3bn

The mix of private investors can fluctuate. After the financial Transport £83bn £7bn £6bn crisis, for example, new regulatory requirements made banks step back from longer term loans and risk-heavy projects. In Utilities £0.3bn £57bn contrast, institutional investors such as insurers and pension 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% funds stepped forward – but these investors, by their nature, prefer operating assets with known returns and no Taxation Mixed funding User charges construction risk. Figure 1.2. Funding of the Infrastructure Pipeline 2016-2129 Many attempts have been made to mix the strengths of public and private investment. Public Private Partnerships (PPP), for Arguably, the principal challenge for the Northern example, can be very successful, particularly in situations Powerhouse is funding rather than financing30. Issues where funding comes directly through user tolls rather than around PSND notwithstanding, both public and private taxpayers. The Mersey Gateway Bridge provides an example finance is readily available for good quality infrastructure of such a concession. But such opportunities are limited for investments. The challenge is how to repay that investment Northern Powerhouse infrastructure. In the early 1990s the without burdening households too heavily. UK launched the Private Finance Initiative (PFI). This was

25 This was used for the Mersey Gateway bridge, for instance. 28 National Infrastructure Commission (2018) National Infrastructure Assessment, NIC. 26 Winch, G. M. & Schmidt, S. E. (2016) Public Private Partnerships: A 29 Review of the UK Private Finance Initiative. In: Jefferies M.C. & Rowlinson, Institute for Government analysis of Infrastructure and Projects 31 McKinsey op cit S. (Eds) New Forms of Procurement: Public Private Partnerships and Rela- Authority data. tional Contracting in the 21st Century. London, Taylor and Francis. 35-50. 32 Global Infrastructure Hub (2018) Infracompass UK Overview, GIH 30 KPMG (2018) Transport for the North Long Term Investment 27 Hammond, P. (2018) Budget Speech, 29 October. Programme. Transport for the North. 33 Ibid 18 Building the northern powerhouse: How do we boost transformative infrastructure investment in northern England? Infrastructure@Manchester 19

Conclusions and initial recommendations

In this first paper, we have argued that investment in the It is the view of the authors that the case for transformative crucial transformative infrastructure that the Northern investment in Northern Powerhouse infrastructure is clear – Powerhouse needs to achieve its ambition faces two main particularly in the area of transportation, but also digital and challenges. First, it suffers because of the historic under- energy. An increased level of investment in all three areas investment by the UK as a whole in infrastructure, and will have consequent positive impacts on productivity, second, it suffers because the investment in transformative regional economic growth and national economic infrastructure that has been made favours the South East. rebalancing. Compared to the South East, the region lacks If the UK is to achieve the ambitions of the Industrial transformative infrastructure; increased local investment in Strategy for the whole country, both of these challenges such infrastructure will improve productivity, regional need to be addressed. The subsequent papers in this series economic growth and the national economic balance. will explore how this can be done in more detail. Financing is available for investment in the areas of transportation, digital and energy. The means to justify Thanks to developments over the past decade, the UK has increased investment lies - as we will cover in the next world-class institutional arrangements in place to ensure papers - in an adjustment of the appraisal methods that that money is well spent, and these are now being replicated inform investment decisions. at the Northern Powerhouse level. However, the UK also needs to improve its capability for project delivery so that the investment case is delivered – the topic of the fourth and fifth papers. There are still challenges in infrastructure project delivery – even on projects that are widely recognised to be using best practice. Crossrail is a recent case in point.34

34 Crossrail delay overshadows project’s overall success, Financial Times, 17th September 2018. 20 Building the northern powerhouse: How do we boost transformative infrastructure investment in northern England? Infrastructure@Manchester 21

Section three Recommendations and next steps

At this stage of our programme, we make three overarching recommendations:

A new pan-Northern coordinating body should be set up for infrastructure development and resilience. This body should advise national and local government, as well as business and third-party stakeholders, on the opportunities, networks and barriers between infrastructure sectors, and deliver an integrated pipeline of infrastructure investments.

Campaigning around infrastructure investment by the Northern Powerhouse and its Metro Mayors should be focused on transformative infrastructure assets such as Northern Powerhouse Rail and HS2 phase 2, rather than a generalised “ask” of central government which risks competing for a larger share of a shrinking budget. Within this campaigning the opportunities for private sector investment such as at the Manchester Airport Interchange should be maximised.

It would be appropriate to commission further research into the implications of regional differences in inflation rates and sectoral differences in multiplier effects for investment appraisal – this might be an appropriate task for the National Infrastructure Commission or Transport for the North.

Transport for the North Strategic Transport Plan 2019 22 Building the northern powerhouse: How do we boost transformative infrastructure investment in northern England? Infrastructure@Manchester 23

Appendix - Glossary The authors

Agglomeration Economies: The benefits that come when Growth: An increase in the market value of the goods and firms and people locate near one another together in cities services produced by an economy, compared from one time and industrial clusters. period of to another.

Bankability: The willingness of private investors to finance Infrastructure Services: The benefits supplied by a project or proposal at a reasonable interest rate. infrastructure assets as shown in Technical Note: Infrastructure Services Classification on page 7. Concession: A type of PPP where an SPV contracts to finance, build and operate public projects in return for a Multiplier Effect:Shorthand for the way in which a change regulated funding stream direct from users (such as a toll) or new injection in spending produces an even larger change before returning the asset to public ownership. in final income. It is usually measured through the direct and indirect employment generated by the investment. Economic infrastructure: Long-lived and costly capital assets often with complex design architectures that are Private Finance Initiative (PFI): A type of public private required for economic growth and development in the partnership where an SPV contracts to finance, build and public and private sectors. Economic infrastructure is operate an infrastructure asset for an agreed funding Graham Winch is a Professor of Project Management and Dr Rehema Msulwa is a Research Associate in Infrastructure distinguished from social infrastructure such as schools stream from the taxpayer. Typically used for social rather Academic Director for Executive Education at Alliance at Alliance Manchester Business School, where she and hospitals which support broader societal goals. than economic infrastructure, but has been used to keep Manchester Business School. completed her PhD in Business and Management. Before privately financed roads toll-free. this, she trained as an Applied Economist at the University Enabling Infrastructure: Long-lived assets engineered and He has run construction projects and researched project of Cape Town in South Africa. Her research focuses on the constructed to support growth on the existing trajectory. Productivity: A key source of economic growth and organising across a wide variety of engineering sectors interplay between infrastructure provision, urban competitiveness typically calculated for the economy ranging from motors to aerospace. He is author of Managing development and regeneration, and the opportunities and Financing: The process of raising the capital to invest in the as a whole, as a ratio of gross domestic product (GDP) Construction Projects: an Information Processing Approach challenges associated with creating livable and productive infrastructure asset. to hours worked. 2nd ed (Wiley-Blackwell, 2010) and numerous journal articles. cities. With a particular focus on transportation projects, her work reflects the technical, financial, political and Funding: The income stream generated by the Public Private Partnership (PPP): A long-term contract Professor Winch been an advisor on construction innovation environmental factors affecting and affected by the infrastructure services provided by the infrastructure asset between a private party and a government entity for policy to the Dutch, French, and UK governments, and is a movement of people and goods. which provides the ability to repay the financing capital. providing a public asset or service, in which the private member of the Editorial Advisory Committee of the This may be directly from consumers of the infrastructure party bears significant risk and management responsibility, International Journal for Project Management. Dr Msulwa has worked previously at the African services (tolls; utility charges); from taxation; or mixed and remuneration is linked to performance such as in PFI Development Bank in Côte d’Ivoire and at the Human (see figure 1.2). or a concession. Sciences Research Council – South Africa’s statutory research institution. Gross Domestic Product (GDP): A measure of economic Special Purpose Vehicle (SPV): A subsidiary company activity in a country calculated by summing the final with an asset/liability structure and legal status that aggregate value of all the finished goods and services makes its obligations secure, even if the parent company produced within a country’s borders in a specific time goes bankrupt. period less the value of the imports required for those goods and services. Transformative Infrastructure: Long-lived infrastructure assets engineered and constructed Gross Value Added (GVA): A measure of the contribution to increase the potential productivity growth rate to GDP made by an individual producer, industry or sector above the current trajectory. calculated by adding the total value of goods and services minus the cost of inputs that have gone into the production of those goods and services. GVA is shared between government (through taxation), employee incomes, and profits.